Former ABIL CFO on why we should worry about unsecured lending

Unsecured lending has slowly but surely emerged as one of the biggest social and financial challenges facing South Africa today. The strikes and violence in the platinum industry can be, to a degree, attributed to predatory lending practices by unregistered loan sharks and other unsecured lenders, and concerns are mounting throughout the financial services industry as bad debts begin to accumulate in unsecured lending books. In this interview, Dave Woollam, who served as African Bank’s financial director for several years, explains to us how the problems we’re seeing today emerged. According to Woollam, the troubles in the market have their roots in the low-interest rate heydays of a few years back, when lenders were competing with one another to grow their books, with little thought for what might happen down the line, when rates rose and consumers came under pressure. Those chickens are certainly coming home to roost at Abil today. – FD

ALEC HOGG:  Joining us now in the studio for a look at the confusion that reigns around ABIL and the whole unsecured lending industry, is Dave Woollam.  He’s from Summit Financial Partners and of course, a man with a deep insight into ABIL having been the Chief Financial Officer there some years back.  Last time you were here with us, you said when you left ABIL you had misgivings.  They seem to have come to fruition.

DAVE WOOLLAM:  Thanks, Alec.  My concerns in this industry have been building for a number of years.  Whilst the results in ABIL and certainly, across this industry have come to a head in the last six to 12 months, one needs to go back quite some time to really see what happened.

ALEC HOGG:  A head of steam has been building.

DAVE WOOLLAM:  This head of steam has been building up for quite some time and I guess what we’re seeing now is the final outcomes of that, which have translated into very poor results for these companies.  If one goes back, the start of this industry was built around some fairly simple principles.  Unsecured lending is a high-risk business.  That’s the starting point.  With mortgages, one experiences very low default rates, but one always has the security of an asset, so you can keep your interest rates really low.  It’s a very tight model…lots of cost focus.

ALEC HOGG:  Unsecured means you don’t have an asset.

DAVE WOOLLAM:  Unsecured means you have no asset.  You have no security on the person’s ability to generate income and therefore, repay you.  If one looks at the start of this industry there was kind of benchmark, which was that roughly 15 percent of consumers who were loaned to, would default – so one in six – for many, many years.  This is going back from almost 2000, all the way through the mid-2000’s.  After recovery processes, when the collections process would be engaged, you would end up with a net loss of about ten percent – so roughly one in ten.  You would lend out ten loans and one borrower would default.  The model then worked on the basis that you could price for that one default, you could recover your costs, and you could pay your funders, and earn a nice return for your shareholders.  What then happened in the late 2000’s?  The competitive pressure/competitive environment started to build up and each player started to try to outdo each other.  They therefore started to lend for longer terms and larger amounts of money, to consumers who were perceived to be low risk.  All the dialogue…all the talk was ‘we’re going to increase our exposure to low risk customers’, but the very nature of that was that pushing credit into that low risk space created high risk customers because they took on too much credit.

ALEC HOGG:  Was there not a central repository where you could see that Alec Hogg is coming in to borrow from ABIL, but he’s already borrowed from Capitec and he has this line of credit on the other side with FNB.  Is there any way of checking that or did you just have to take the customers’ word?

DAVE WOOLLAM:  No, there are bureaus.  The bureaus are very accurate.  Creditors could see exactly who had exposure to what, but in many cases, it was the creditor who wanted to increase their exposure to a customer.

ALEC HOGG:  So it was the other way around.  It wasn’t necessarily me coming in and saying ‘please give me more money’.  It was the banks saying ‘don’t you need more’.

DAVE WOOLLAM:  Absolutely.  There’s no doubt that this has been a sales push industry with a lot of marketing, which is natural.  If one looks at banks, one has to realise that there are two forces always at play in a bank.  There’s the sales/lending/trading side, which wants to take risks, and then you have the credit and risk management people who need to be able to understand, moderate, and reflect on that risk.  There needs to be strong people on both sides of that equation who, together with the CEO, will find a harmonious balance.

ALEC HOGG:  It looks like at ABIL, the marketing team was…

DAVE WOOLLAM:  I think the marketing team had the ascendancy and in the industry, that happened and there was this push.  What happened though is there was a kind of sandwich/wave effect in that as these bigger loans went into the market, yields started to fall.  Bigger loans mean cheaper loans.  The assumption was bigger loans to low risk customers would be lower risk and therefore, you could compensate for those lower yields with lower risk.  However, there was a long emergence period of when that risk would play out.  We see, as in the cellphone industry, lower margins – bigger volumes…you get a trade-off.  It’s fine.  In this industry, what happened is lower margins…the risk started emerging 12 to 18 months later and suddenly, the bad debts popped.  What we’re seeing now is a default rate of 25 percent.

ALEC HOGG:  Not the old 15…

DAVE WOOLLAM:  Not the old 15.  What we’re seeing is a 25 percent default rate with a 15 to 20 percent net.  When you see that doubling, the pricing that you assumed simply can’t absorb it and then you still have to pay your costs, you still have to pay your funders, and shareholders lose out.

ALEC HOGG:  But that still doesn’t explain why a company like ABIL had to go back to shareholders.  It didn’t really have visibility it appears, on how deep the hole was.  It keeps going back to shareholders and saying ‘well, we need a few more billion Rand’.

DAVE WOOLLAM:  It’s hard for me to really understand what the motives of an individual company were.  If I look at the whole industry, it’s almost as if it was a foot on the accelerator and that foot was stuck on the accelerator.  It was very hard for the industry to pull back that lending, so we’ve really only seen in the last couple of months the likes of ABIL and some of the bigger players really pulling back.  They’ve been talking about pulling back, but we’ve seen brokers analyse the sales data and we’ve seen…  There’s no doubt that there was still a big push of sales.

ALEC HOGG:  What happens next, Dave?

DAVE WOOLLAM:  Well, I think what we’re faced with now is a very large number of people who are struggling to repay their debts.  The normal process of filtering those people through a collections process, whether it’s to go through the courts to an EOO or garnishee, or whether it’s a debt counselling, there simply isn’t the capacity to manage those people through the existing infrastructure.  The work I’m doing with Summit and various other players in the industry is to say that what we really need now is a special solution for a special problem.  We need almost a National Debt Rehabilitation program.  We can’t solve this.  It has gotten to a pandemic level and what we need now is all role players…  We think employers can play a very important role, because the wellbeing of the employees is critical to their future productivity.  If one just looks at this mining crisis, the issue is not so much that miners are striking.  They are striking for more pay.  People ask ‘how have they gone for ten weeks with no pay’.  The truth is that many of those miners don’t have any pay, because after debt repayments they don’t have any money to take home, so it’s a ‘no lose’ situation.  For many of them, their take-home is a few hundred Rand per month or maybe one-thousand-Rand per month.  They’re actually saying ‘well, I have nothing to lose’.

ALEC HOGG:  What happens to those who supply them with the debt in the first place – the debt providers?  They clearly aren’t able to…

DAVE WOOLLAM:  They clearly have the NPL’s building up which is what we’re seeing –  this big bubble and the National Credit Regulator’s stats show that nearly 50 percent of all credit consumers are now in default.

ALEC HOGG:  So if we talk about the losses that have been incurred in the platinum strike for example – and the employees have lost billions of Rands – at the moment, they’re not feeling it.  The people who will be feeling it will be the financial institutions or the loan sharks lending to them.

DAVE WOOLLAM:  I think so.  The order of magnitude is the employers have lost productivity, credit providers have lost access to their collections, and the employee is the last one to lose whatever net residual money he was getting.  In many cases, that was meagre and a pittance.

ALEC HOGG:  Well Dave, it’s a crisis and as you have well illustrated, needs maybe some more attention from those who can make a difference – perhaps a ‘debt forgiveness’.  Who knows?  I remember that the Nigerian government spent a lot of time fighting on debt forgiveness, got it right over a decade ago, and that economy has surged ever since.  Whether that would ever happen in this instance is of course, debatable.  That was Dave Woollam from Summit Financial Partners.

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